Greenback started week with a bounce but will it last?

22 May, 2017

It’s been a challenging few days for our prop desk with a slew of risk-off deals – including long gold and short SPX – failing to deliver. Some modest long GBP positions are profitable but these calm markets aren’t as expected.

We have a very quiet day ahead in terms of economic readings. A number of FOMC members will be speaking on an array of subjects, but unless there’s a coordinated message here this is unlikely to deliver much direction. Risk mitigation may remain in focus with the questions that are hanging over Donald Trump, but again there’s little to suggest progress here will be seen quickly.

The US dollar has kicked off the new trading week with a modicum of support. The DXY dollar index is up around 0.2% and EUR/USD has lost its grip on 1.1200 – at least for now – but it’s difficult to see this as being sustainable. Generally, other major central banks are starting to back away from the ultra-lax monetary policies that have prevailed of late, and gave the USD an edge in recent months. On top of this we still have those storm clouds gathering over Washington regarding how tenable Donald Trump’s position is. The gains we’ve seen in recent hours could simply be explained away as a modest relief rally over the that there’s been no further escalation regarding the President’s situation, but especially given the absence of any meaningful economic news, it’s difficult to see this boost for the dollar as being the start of a new trend.

6am GMT tomorrow sees the release of the revised Q1 German GDP readings and given the generally encouraging sounds we’re hearing from the Eurozone right now, there’s absolutely no cause for concern over this print. However this does suggest that even a modest variation from expectations could deliver a slug of volatility for the common currency.

RBA assistant governor Debelle is delivering a speech in Switzerland later this evening and given the relative absence of economic data that’s on hand today, this could take on added significance. The RBA is walking a proverbial tight rope as it looks to maintain economic growth against slowing demand from China and falling commodity prices, so any clues over where interest rates might go next will be closely followed. There’s a widely held belief that the next round of tightening won’t be seen for at least a year, although some policy hawks at the bank haven’t hesitated to shoot down this idea, but with global economic growth looking turgid, is this anything more than jaw-boning in a bid to control an overheating credit market?

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